How Does a “Flash Loan” Differ from a Traditional Collateralized Loan in DeFi?

A flash loan is a unique, uncollateralized loan that must be borrowed and repaid within the same blockchain transaction (or block). Traditional loans require collateral to be posted upfront and can be held for an extended period.

Flash loans are used primarily for arbitrage, collateral swapping, or liquidation exploits, as they allow users to utilize massive amounts of capital instantly without any personal risk of loss, provided the entire operation succeeds atomically.